How to create a debt reduction plan

debt reduction plan

Today’s guest post on how to plan a realistic budget and create a debt reduction plan comes from Catherine, a freelance writer.

How to plan a realistic budget and create a debt reduction plan

Are you struggling to repay debt? Don’t worry! Continue reading to know about what to consider when you’re planning a budget and how to create a unique debt reduction plan.

What to consider while planning a budget

You may be having an idea about how to plan a budget. Before planning one, check out a few things you need to consider.

Ask yourself why you are budgeting

If you’ve decided to plan a budget since your friends are doing it, I would advise you, don’t do it. You won’t be successful. You need to have a definite reason to start planning a budget. For example, if you want to save a substantial amount every month to repay your debts, then try planning a budget since you have a definite goal to attain.

Know exactly how much you make and spend

Yes, it is a fact that most of us don’t have an idea of how much we actually earn every month. First of all, take into account your take-home pay minus the taxes you’ll have to pay annually. Use this actual number as the base for planning your budget.

How you earn money every month

Your budget will vary depending upon whether your earning is fixed or variable. If you get paid hourly basis, it is a bit difficult to assess your monthly income. In this case, take an average of your last twelve months’ earnings. However, variable income is quite rewarding too. Some months you get paid more than the average.

What goals you want to attain

The main purpose of budgeting is you need to have a goal in your mind. For example, for the time being, your goal can be to repay your debts as fast as possible. Set something to splurge a little once you attain your goal. This will give you the motivation to achieve your goal.

What determines how your budget will be

Now, it’s time to plan your budget. These are the things that will help you in planning a realistic one.

Your income

Are you taking into account your family income or planning your budget on your single income? Decide that first. Then, start with your budget plan.

Your spending pattern

Apart from the fixed expenses, if you have lump sum annual expenses, then you need to include that in your monthly budget. For example, calculate your holiday expenses and include that in your monthly budget by dividing the amount by 12. Doing so, you won’t be burdened with the holiday expenses at the end of the year and you’ll be able to avoid holiday debt too.

Whether or not you use credit cards

If you have the habit of using your credit cards for most of your purchase, then you’d have to keep the billing cycle as your time frame while planning your budget. Otherwise, it may be difficult for you to keep track of your monthly expenses. Also, build the habit of paying back the entire balance at every billing cycle, otherwise you’ll have to consider the interest expenses as well.

One thing I would like to mention here is that try to plan a realistic budget as otherwise, it’ll be difficult for you to follow.

Create a unique debt reduction plan

Now, it’s time to create a debt reduction plan which will be suitable for you.

Here are a few options.

Debt consolidation

You can opt for this method if you’re struggling to repay your multiple bills and payday loans but you can repay them in full. This has a positive impact on your credit score. You can choose from a debt consolidation program, consolidation loan, or balance transfer method as per your suitability.

Debt settlement

This option is for you if you can’t repay the outstanding balances in full. Though it helps you to get rid of debts pretty fast, it can affect your credit score negatively. You can enroll in a settlement program or opt to negotiate with your creditors on your own.

Debt snowball

In this method, you have to make minimum payments on all your debts and pay a little extra on the account with the lowest outstanding balance. Once you pay that off, shift your focus to the second-lowest debt in your list. You have to continue like this to repay all your debts.

Debt avalanche

If you opt for this method, you make minimum payments on all and pay extra on the debt with the highest rate of interest. After paying it back, pay extra on the second-highest interest rate debt. Continue with this until all debts are paid off.

Take professional help if required

If you think that you can’t repay your debts on your own and need professional help, you can take the help of consolidation and settlement companies. For example, to deal with your payday loan debt, you can search for online payday loan consolidation companies and choose a suitable one.

If you wish, you can also opt for a combination of two or more strategies. For example, you can consolidate some bills and settle other debts. Likewise, you can make a list of your debts and pay extra on the lowest balance as well as the highest interest rate. You can create one as per your choice.

Additional tips to succeed in your debt repayment mission

  • Get into the same page with your partner as it’s easier if you help each other
  • Change your attitude first before asking your partner to do so
  • Break your annual expenses and include them in your monthly budget
  • Always deposit something for the emergency fund
  • Do not use credit cards for the time being

The most important thing, you haven’t accumulated your debt overnight. So, it’ll take some time to get rid of it. Be patient and stay motivated. This is the key to solving your debt problems and have a good financial future.